Muted oil prices, wage growth holding UK inflation at bay

LONDON • Bank of England (BOE) officials said low oil prices and subdued wage growth will keep a lid on inflation as they left their key rates at a record low.

In the minutes of its meeting this month, the Monetary Policy Committee (MPC) weighed "robust growth" in domestic spending against weak overseas demand, and said eight of the nine panel members voted to leave the benchmark at 0.5 per cent this month.

"There would need to be a sustained firming in domestic cost pressures, compared with current rates" to push inflation back to the 2 per cent target, officials said.

"The price of oil had fallen markedly again, increasing the likelihood that headline inflation rates would remain subdued, and nominal-wage growth had levelled off."

Inflation stayed below zero for a second month in October and recent economic data has been mixed, giving the BOE room to leave the key rate unchanged for now.

While the central bank said there was "no mechanical link" between its policy and that of other central banks, it is caught between a European Central Bank that is adding stimulus and a United States Federal Reserve that may be just a week away from the first increase in its key rate since 2006.

The BOE said the prospects for international and domestic activity had not changed that much since its November meeting and noted that "the more material news on the month had been in costs".

Last month, the central bank noted that falling commodity prices and an increase in the pound were dampening prospects for inflation.

A trade-weighted measure of the pound has jumped almost 6 per cent in the past year.

Returning inflation to target "depends on an increase in domestic cost growth sufficient to balance the drag on prices from very subdued global inflation and past increases in the value of sterling", the December meeting minutes said.

Overall, the balance between growth in pay and productivity is "a key aspect" of the MPC's policy assessment, the minutes showed.

Economists predict the panel will keep the key rate unchanged until well into next year.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on December 11, 2015, with the headline 'Muted oil prices, wage growth holding UK inflation at bay'. Print Edition | Subscribe

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